Macroeconomic data and the bond market are signaling that the US economy is heading for a slowdown but yet equity markets remain robust. Tony Nash, CEO of Complete Intelligence explains why whilst giving us his views of Asian equity markets.
Transcript
BFM: And you’re listening to the Morning Run with Keith Kam and I’m Wong Shou Ning.
Now in about 30 minutes, we’ll be speaking to William Passet from Nikki Asia on Nancy Pelosi’s Asian trip. But let’s recap how global markets closed yesterday.
Yeah, on Wall Street, the US markets are looking quite green. The Dow ended up 1.3% the S&P500 was up 1.6%, while the Nasdaq was up 2.6% earlier in the day. Asian markets, we are looking at the Nikkei which ended up 0.5%. Hong Kong Hang Seng closed 0.4% higher, but Shanghai’s Composite was down 0.7%. Singapore’s STI was up 0.4%, while back home burn, Malaysia’s FBM KLCI ended 0.3% lower.
So for more on international markets, we have on the line with this Tony Nash, CEO of Complete Intelligence. Good morning, Tony, always good to speak to you. Now, we’re still in the midst of well, it’s the tail end of earning season, which hasn’t been too bad. And of course, last night there’s an influx of economic data coming out of the US. But can you tell us what actually determines the direction of markets because it’s just been so volatile in the last few days?
TN: Yeah, I think there has been a growing view in the last week or so that the Fed may change direction in September. And I think markets are becoming optimistic that the Fed may ease or at least stay neutral in September instead of raising. At this point, I think that’s a little bit over optimistic, but I think it depends on how economic data, say, inflation particularly come out over the next, say, 40, 45 days.
BFM: So your view we are far from peak inflation?
TN: I don’t necessarily think we’re far from peak inflation. I think there are a number of things that could potentially over the next, say, four to six months, actually ease inflation. If for example, the Russia Ukraine war stops, which I think that is a potential over the next six months, those types of things really could help to ease inflation. Something that could hurt inflation is, let’s say, China decides to actually let loose some of this fiscal spending it’s been talking about for so long. If they do, that could really put upward pressure on things like energy and precious metals. So there are some major kind of forces that could swing markets one way or another.
BFM: Another data that came in, Tony, it was July US PMI manufacturing index. And that came in lower than June at 52.8, but it still indicates expansionary activity. What was responsible for this upbeat reading?
TN: Yeah, it’s above 50, which means things are growing. But I don’t know that I’d necessarily call it upbeat because the economy is decelerating right now. So we saw new orders and employment, both contracting, manufacturing backlogs are growing.
On the positive side, supplier delivery times are improving. So that tells me that kind of supply chains are improving, which is great. Raw materials inventories are growing, which is great, and prices are rising at a slower rate.
So inflation, at least PPI, according to this survey, things are slowing down. So I think if this continues to slow that with the services PMI, we could potentially have another quarter of negative GDP growth. So I’m not saying it’s going to happen. I’m saying with this and the services PMI, that raises the prospect of that happening.
BFM: Can we say that we are actually over blowing fears of an economic downturn? That, I mean, it’s not as bad as some analysts put it.
TN: Well, it’s definitely slowing. I think the downturn I don’t know that it’s necessarily being overblown. I think those fears are well founded. But if you look at the way, say, consumers and businesses continue to spend, what we don’t have is, let’s say, volume growth, necessarily of markets, but we do have price growth. So if you look at some of the consumer companies, like food manufacturers, consumers have accepted double digit price growth in the most recent quarter. But volumes from manufacturers, from, let’s say, food manufacturers, have grown by kind of 0% to 1%. So their revenues may have grown by double digits, but their volumes have stayed pretty steady.
BFM: Another thing, Tony, is the bond market, right? So we’ve seen the shorter tenor yields rising, but longer, maturity rates decreasing depending on key yield curve, inversion signaling a recession. So we have many indicators of a recession, but yet markets seem to be holding relatively well, especially if you look at it from a year to day basis. Still negative territory, but isn’t so bad. So why the confusing messaging?
TN: Well, I think part of it is the Feds not being clear about what their next actions are. Powell in the Q and A of the most recent meeting said basically, look, there’s a long time between now and September, which is the next Fed meeting, and there’s a lot of data that’s going to come out. So we actually don’t know what our policy is going to be in September. And they stopped forward guidance. So when you stop forward guidance and markets need information to set price expectations for securities, markets are searching for a pricing level. Is it higher or is it lower? They’re always searching for that. So without guidance, it’s really hard for investors to understand where those prices, meaning stock prices or commodity prices or whatever, will be.
BFM: What’s your view in terms of Asian equity markets in the last two, three days? Of course, North Asian markets like the Hong Kong and the Shanghai have seen sharp corrections on the back of Nancy Pelosi’s visit to this region. Do you think actually it’s a buying opportunity? Very well could be.
TN: Again, I think the Chinese government could kind of as a way to frustrate the Biden administration, they could actually launch a massive stimulus program and get money into the economy very quickly. If they did that, it would raise commodity prices and it would really make the Biden administration look bad just before the midterm elections in November. It could be bullish for Chinese securities and North Asian securities. It would also be bullish for commodities. So it wouldn’t surprise me because Chinese government is very smart. It wouldn’t surprise me if they did something like that in order to frustrate the Biden administration and have his party lose both houses of Congress.
BFM: All right, thank you for your time. That was Tony Nash of Complete Intelligence giving us
his views on where markets are. And it’s rather confused because we also aren’t getting much signaling coming from the Federal Reserve, which is the key, I think, if you ask me, the key driver in terms of where markets are hitting.
I think everybody who is questioning whether peak inflation is here, it probably is very close. But is this the end of this normalization of monetary policy? How many more rate hikes are the Fed going to implement before the end of the year? But very quickly, we’re also looking at some results.
First off is Ebay. They reported second quarter revenue that beat street expectations and an upbeat profit outlook, evidence that a new focus on luxury items and collectibles is helping offset slowing sales and customer traffic. It shares rose about 5% in extended trading and back to the sales, it decreased 9% to 2.42 billion. Rigid analysts. On average we’re expecting $2.37 billion not ring gate earnings per share was ninety nine cents per share, beating estimates of Ebay shares rose to a high of $55.4 $55.4 in extended trading after closing at 50 and a half in New York.
Well, there are ten buyers on this name, only 18 homes and two sells. So not a big buy on Wall Street by any measure. Consensus target price for this stock is 53 USD $46. Like he said, it actually closed. This is not after hours trading, but closed at 05:00 p.m.. US. Time it was $50.48. It was up 2.5 cents. Now, another company that reported results is booking.com. They reported bookings in the second quarter, pun intended, that top street analysts and forecast record revenue in the current period, confirming what we already see a very strong start to what was expected to be a blowout summer travel season.
Anecdotally we can also see that generally people are out traveling a lot more and booking.com recorded gross bookings, which represent the total value of all travel services booked.
It came at $34.55 billion. And this beat and endless expectations of 32.8 billion. Total sales nearly double to $4.29 billion, less than analysts’average projection of 4.33 billion.
Not that far off its net income came in at $857,000,000, compared with a loss of $167,000,000 last year. But that was Colbyte. Yeah, I would expect less from them. The street likes the stocks. 23 buys ten holes. One sell consensus target price for the stock.
Am I looking at it correct? $2,524. Last time price $1,966.48. It was up ten point $18.
But Abdic will be speaking to Doctor Jeffrey Williams on Malaysia’s move on MNC tax implementation.
And what does this mean for foreign direct investment?
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In this QuickHit episode, we’re joined by Mike Green to talk about what will happen if China invades Taiwan? We’re not saying that China is going to invade Taiwan, but what if it is to happen? What will be the impact to markets?
Mike Green is the chief strategist and portfolio manager for an ETF firm called Simplify Asset Management. They specialize in derivative overlays and derivative structures that modify the traditional market exposures. Their flagship products are things like US equities with downside protection.
His background prior to Simplify, has been in hedge funds for about 15 years and have built an expertise or a degree of renowned for the work that he does in primarily the derivatives and volatility space and have managed traditionally in what’s referred to as a discretionary global macro style. The assets that he purchases or that he monitors exist around the world, including places like China, Taiwan, et cetera.
A lot of the discussions Tony and Mike have had around Taiwan are tied to some geopolitical observations and some dynamics that exist in which Mike played a role less under the Biden administration. But in the prior administration had an advisory capacity to some components of the Department of State and Department of Defense.
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This QuickHit episode was recorded on December 2, 2021.
The views and opinions expressed in this What happens to markets if China invades Taiwan? Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: So today we hear or any day, pick a day. We hear that China is invading Taiwan. What are the first things that come to your mind as the news crosses the wires?
MG: Well, I think there’s a couple of things that are really important about the question of is China invading Taiwan, right. And so what we have seen very clearly, and this is fact, not speculation, is a dramatic escalation of China’s incursion on what would traditionally be thought of as Taiwan sovereignty or independence. Right.
We’ve seen a dramatic increase in boats transitioning across the international marine borders. We have seen a dramatic increase in incursion of both fighter jets and bombers into Taiwanese airspace. And in general, the strategy that you see China engaged in is what is typically thought of as a precursor to an invasion. They’re effectively forcing Taiwan to maintain alertness and readiness, which slowly degrades the quality of defenses.
If you have to constantly scramble jets, there’s only so many hours that you can actually have them in the air. There’s only so many hours you can have pilots operating before their capability deteriorates. That is very clearly what is in play here.
Now, it’s an unknown question whether they go to the next step, whether they take what is currently a largely psychological and relative resource advantage to degrade Taiwan’s capabilities, whether they turn that kinetic as compared to hoping for a psychological collapse where Taiwan effectively decides to sue for the best possible deal they can get is unclear.
And I think that’s really what we’re all debating. I mean, China has come out very clearly. Others have made this observation, and it’s not dissimilar to my former employer, Peter Thiel’s observation about Donald Trump, right. That everyone takes him literally, but not seriously. I would flip that on its head. And everyone say everyone takes Xi seriously, but not literally when he says we will reunify with Taiwan in one form or another within the next five years.
And that’s the core of the question. Are they going to do this in a peaceful fashion? Are they going to do it in a kinetic military fashion? What are the ramifications of each of those two strategies and what’s the state of gameplay that is in place right now, as each side including the allies of Taiwan in the form of Japan, the United States, et cetera, evaluates how they want to respond to it.
TN: Right. What is that? What are those initial responses that you think happen, setting aside battle plans, of course. Honestly, I don’t believe that Min Def or DoD know 100% of whether this will happen or not. I think everything is a potential.
What do you think those reactions are initially in terms of, say, markets, investments, even things like trade? Those are like, what do you think happens right away?
MG: Well, I think there’s a couple of things that are worth hitting on. Right. So the first is why does China want Taiwan or why does it matter? Right. So one component is just the psychological final victory over the Republic, the Taiwanese Republic, what is known as the Republic of China outside of the area.
When you think about that dynamic, this is a final victory that would allow Xi to place himself permanently on par with the founders of the Chinese Communist state. Right. The Mao’s, et cetera, of the world. So this is a huge accomplishment.
I think there’s a huge misunderstanding that the objective is to obtain the semiconductor resources, right. To me that feels, one, extremely unlikely to expect that they could do that successfully, and two, I’m not sure it’s actually entirely relevant. Right. But that does then speak to the indications that the game is being taken much more seriously.
And so one of the things that I would point to people is the dramatic expansion of capabilities and investment that Taiwan is making in Arizona, where they’ve effectively doubled on a nameplate capacity and potentially up to 5x the capacity of TSMC in Taiwan. Now, that’s a huge implication.
If we were to put ourselves back into the 17th century, it would be the akin of a European sovereign entity, a small Principality, taking the Crown jewels and shipping them for safekeeping somewhere further away when they were faced with a threat, taking the error apparent and shipping them abroad so that there’s a base of operations. If you think about TSMC’s investment in Arizona, that can be very easily thought of as a base of operations and a source of income for a government in exile. Right. So I don’t think Taiwan is planning on going away.
It also opens up kind of the interesting angle of how effective is China’s strategy, because I think that China broadly looks at it and says, we can wear them down and I would point to it and say, yeah, your best opportunity was actually probably a year ago to use the element of surprise. Now you’ve pretty well telegraphed it. Taiwan has made significant advances. The US Department of Defense, in particular, I would argue, would have been caught very much off guard a year to a year and a half ago. Today they’re pretty much on top of this, right.
The Pacific Theater has been opened pretty widely. You’re actively hearing expressions of support from South Korea, Japan, et cetera. So to me, it feels like the element of surprise has been lost, and now it just becomes a question of, is this ultimately going to happen? It seems extremely unlikely to me that it will be a long term successful component.
Then you have to ask yourself the last question, which is, why does China care beyond simply the moral victory or the desire for that? And that’s where you and I have been through these maps. And I don’t know if we’re doing this in a visual format, but I could share it if you wanted to.
The way the world looks at China is not the way China looks at itself. Right. So the traditional map that we think of with China when we look at it, we see this large access into the Philippines and in the Pacific Ocean. It looks like China has a coastline that is similar to the rest of the similar to the other great powers like the United States. The reality is that their entire access to the Pacific Ocean is framed and blocked by barrier Islands, Taiwan being the most prominent of those. Japan to the north, being another equally important one. The Philippines come into play. Okinawa comes into play there, et cetera. Right. What they’re really trying to do in terms of expressing a desire to take over Taiwan is to break into the Pacific Ocean and pick up that Deepwater Navy capability that is absolutely mandatory for an “Empire to express power.”
Map of China and countries surrounding it. Image from Google Maps.
So I think we’re at kind of a point of maximum uncertainty where it feels like they may have missed the best opportunity to do so. But as you and I have talked about, I’m not sure that China is actually as good at this game as everybody thinks.
TN: I’m with you on that. Yeah, I don’t think they are, either. And one of the things that I’m seeing more and more of two years ago, a year and a half ago, as you mentioned, China was winning diplomatically, not everything. But there was more of a positive bias toward China.
Today, they’re just annoying people. And so if they take an action like that, it seems like they start from a negative position, and it’s hard for them to get to a positive position out of that when Xi Jinping was going to the left to talk and all this other stuff, he had a lot of positive momentum behind him, and he actually could have done a lot of really terrible things, which, if you look at what’s happening in Xinjiang and other things, he did a lot of terrible things. He could have done more, actually. And I think the world would have turned the other way. But now I think it’s really hard for them to turn the other way. Does that make sense to you?
MG: No. I actually think that’s true. I think that they may have gained a degree of false confidence off of the failure to react to Hong Kong. But absolutely, with the exception of… Australia has clearly turned. The UK has recognized that it has to turn. Europe continues to enjoy the schadenfreude of the US’s relative standing having deteriorated. I think Europe is slowly waking up to the risks of their reliance on Russia, particularly for energy supplies.
And an interesting angle, and again, you and I have talked about this offline, would be the dynamic of a simultaneous move in both directions by Russia to expand into Ukraine and China, to expand into Taiwan and the immediate aftermath of the Chinese Olympics in Beijing this winter, which is February. From a purely mechanical standpoint, it’s almost impossible to mount any form of attack on Taiwan until May due to weather conditions, and an amphibious assault would make no sense, you could certainly see an airborne one.
I think there’s a very real chance that we see at least an increase in the drumbeats associated with that to test it out. But Europe will eventually turn, right. They have to understand at their core that they are an exposed peninsula on the Eurasian continent, and they really can’t allow China and Russia to become as dominant as they are expressing at least their interest of becoming.
TN: That’s right. Okay. So you bring up an interesting analog when you mentioned Hong Kong. Okay. So Hong Kong and Taiwan used to be this kind of holdouts from the mainland, and people looked at them as these democracies-ish, although Hong Kong, whether it was a democracy or not as questionable. But the takeover of Hong Kong is one that happened.
I was telling people in 2014 that it was already done. That this was going to happen. And for five years that I talked about it, people said, no, you’re crazy. It’s not going to happen. There’s too much money that goes through Hong Kong and so on and so forth. But it happened. And now in the wake of it, people just kind of shrug their shoulders like, okay, whatever it happened. Do you think that a takeover of Taiwan would be similar? Do you think people would just kind of shrug shoulders and say, “they invaded Taiwan. It was going to happen anyway, let’s just move on.?”
MG: No, I think it’s much harder for people to look at it in that context. Now, I would frame it, if we’re going to use a World War 2 analogy. And you always got to be careful with Godwin’s law about this, but it would be the analog to Nazi invasion or the German invasion, more accurate of the Sudettan land, which ostensibly was done in a manner very similar to Russia’s invasion of Crimea and the Dunbas region, were there to protect the Russian speakers.
We’re not actually there to have any form of substantive gain, and the world has broadly moved on from it. Right. Same thing I would argue with Hong Kong. Well, of course it was ours, right? You didn’t actually expect us to sit around 2047 and wait for this. There had to be a gradual progression in that direction.
Now, if this is the definition of gradual, I’d hate to see the definition of sudden. But again, the world has largely ignored it and moved on because for the most part, those outside the region have not experienced a significant shift. And again, if you were to look at foreigners in Berlin around the invasion of Sudetenland, they wouldn’t have seen anything different either. Right. Maybe they would have seen the riding on the wall and gotten out. But as we know, many didn’t.
There’s the risk that this is similar because the reality is if China were to decide to invade Taiwan, and now we can kind of get into the market impact, I don’t think the west can do anything about it. Right. Remember, this is 100 miles, give or take off the 100 km. I’m sorry. Off the coast of China. The US cannot Mount a credible defense and certainly not the ability to take back that region once China has taken it.
And I think that’s kind of the interesting feature associated with this is that like the actions of Germany and Sudetenland or the Blitzkrieg into Paris or any of these components, it’s going to be very hard to undo this. And so the minute it happens, it becomes a much longer protracted extended dynamic. And that’s the reason we care. It’s not so much that are we going to win or lose? Right. Almost any credible analysis of it says that China can indeed take Taiwan.
Taiwan is unique and in terms of its mountainous dynamics, et cetera. It’s uniquely suited in a lot of ways for guerrilla warfare. So my guess is they will be playing an Afghanistan type dynamic for decades if they take it. And the US would certainly be working in ways to resupply that and create harassment and everything else. But it is unrealistic to think that it can be stopped if they truly decide that they’re going to do that.
And that’s kind of the thing that, to me is more interesting is that how do the pieces start to fall together in a puzzle if they were to do that and what is properly priced under those scenarios? And I think, Ironically, people will point to US equity markets and say, oh, they’re going to fall or the dollar would be affected, et cetera.
I think there’s some truth to that certainly on a short term basis. But as you know, I don’t really think that the fundamentals matter all that much in the US equity markets right now. Are Americans going to lose their jobs and stop contributing to their 401k plans? And is the Federal Reserve suddenly going to step away from markets and stop engaging in supportive activity? To me, that seems very low probability. And so while there could very well be a correction, I’d be surprised if it moved in that direction. But I do think there’s other trades that are particularly interesting. Right.
So we mentioned Hong Kong. The Hong Kong dollar has been completely unaffected, both in terms of the absolute level of the dollar and its relationship with the US dollar. In other words, they continue to trade, basically a parody with very minor exception. But also the volatility associated with that. So taking bets against that relationship have retreated to near the lowest levels in years.
TN: Sure.
MG: If China were to make a play for Taiwan, it would be almost impossible for me to imagine a scenario in which that relationship didn’t fray violently. Same thing becomes true for Japan, right. Because Japan has two separate issues. One is they are a client state of the United States, and now they are directly in the face of a kinetic war that requires them to rapidly increase their government spending and to do so under somewhat existential risk. And at the same time, they have to write off, basically the minute they do that, they have to write off all of the collateral that most of their corporates have invested in China, which has become the single largest source of their external investment. Right.
So those to me, the area across Asia feels mispriced for this risk. Even if we’re just talking about a volatility spike, it feels that that area is much more mispriced than the US equity markets, for example.
TN: Interesting. So what you say about Japanese companies riding off their investments in China with the same go you think for, say, Korean companies as well?
MG: Oh, absolutely. You’re effectively placing them in a very difficult situation for sovereign reasons and for very obvious political reasons. Those are regions: South Korea, Philippines, Japan that really can’t get on board the China train. Right. Because it creates too powerful of an entity, and one that you point out is increasingly unliked. It places too powerful of an entity in their backyard.
TN: Okay. So something like 37, we all kind of know this 37% or something of global manufactured goods are made in northeast Asia. Right.
MG: Right.
TN: And if you look at electronics, it’s a lot more than that. I don’t know the number a lot more than that. So you have a manufacturing base, and especially in electronics, you have a manufacturing location where risk all of a sudden is amped up. Okay. What does that do? I know this is kind of an obvious question, but I want to get a little bit into details. What does that do to supply chains, especially around electronics?
MG: Yeah. Well, the quick answer is obviously it throws them into chaos. Right. And the most important point on the electronics that I would make is that while China holds a fraction of the world’s IP on electronics, again, the commentary around semiconductors, they are massive in the assembly process. Right. They’re basically the assembly line or the finishing stop. And so you have a ton of semiconductors that get shipped into China and then shipped out in the form of flat panel TVs, computers, iphones, et cetera.
That would unquestionably be disrupted. Right. And it creates an interesting, there’s an interesting game theory associated with it, which is you’re effectively talking about splitting the world in two at that point in a manner that is very similar to the breakdown of the alliance between the Soviet Union and the United States following World War II. Right.
TN: Right. This is what I’m not sure a lot of people, especially in the corporate world, understand, is how acute and how distinct that break could be if this happens.
MG: Yeah. I agree with you broadly. Now, the irony, of course, is part of the reason that they can’t embrace that is that redundancy costs money.
If I’m going to build a diversified supply chain, it places me at a disadvantage to competitors that do not do so in the interim. It potentially positions me for a knockout punch for a true winning of the game. But even there, you start to have to ask yourself questions. Would it be politically feasible given the likely response in terms of price controls and everything else that would kick in? Right.
I mean, I find it highly likely that a Biden administration or a Republican administration. Remember, the price controls were instituted by Nixon, not by Johnson. When you start talking about those types of dynamics, the game theory doesn’t really support the desire to fully diversify your resources. It places you at a disadvantage to your peers in the immediate future, and the potential rewards associated with it are somewhat in doubt as well because it becomes politically unacceptable to raise prices in response to that type of event.
TN: Right. Everyone else is going to be knocked out. I’ll be knocked out, too. So there’s no advantage or disadvantage to me to have a redundant supply chain.
MG: Correct. There’s a disadvantage if it doesn’t happen, right? You’re maintaining something more expensive.
So it’s hard to look at those who would be most impacted and say that they’re behaving in an irrational way. Right. Like the game theory is actually very much. Don’t do anything. Don’t do anything. Don’t do anything. Panic.
TN: Right. Okay. So we have a lot of risk in, say, Northeast Asian markets. We have a lot of risk to the electronic supply chain. I know this may seem like a secondary consideration, but maybe it’s not. What about Europe? Does Europe just kind of stand by and watch this happen, or are they any less, say risky than any place else? Are they insulated somehow?
Tony Nash joins the BFM team, giving them his views on the equity markets, fixed income market, Fed Reserve, and oil prices. What’s his recommendation to investors now that Dow, S&P 500, and more equity markets have reached a new all-time highs? And what about the consensus on oil? With all the changes in the markets, are we seeing a new economic model?
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Show Notes
PS: Really good day in the U.S. The Dow and S&P 500 were up 0.3%. The Nasdaq was flat. Shanghai is up 0.7%. But the rest of Asian markets were down negative. Heng Seng was -0.4%. Nikkei down 1%, FTI down 1.5%. And back home, FBI culture was also down 0.01%.
WSN: So to help us make sense of where markets are going, we speak to Tony Nash, CEO of Complete Intelligence. Now, Tony, Nasdaq, S&P 500, Dow, all hit all-time highs. Does this make you actually nervous? Markets looking a bit toppish?
TN: I don’t know about toppish today, but I guess what people have to be aware of is how big is the gain from here? So whether you’re toppish now or toppish in October, you really have to be careful about the risk calculation right now and what your expectations are as things turn over in the coming quarter or two.
PS: But time to switch for anything. What asset classes or markets look attractive now?
TN: You know what. I think you just got to be careful all around. The expectation, evaluations, levels of investment, profits and so on seem pretty stretched as we’re in the middle of wage pressures, inflation pressures and stressed consumers. So I think there seems to be more risk than opportunity out there. So I think we’re in a pretty stretched market and short of more support from global governments. It’s really hard to justify significantly higher valuations.
SM: And everyone is, of course, looking at the Fed, where last night’s FOMC minutes, what financial markets expected from the Fed or or do you think they could have given more clarity on their monetary policy?
TN: Well, they can always give more clarity. I mean, there’s always kind of reading the tea leaves with the Fed. But I think what really came out of it was what was expected. It was pretty noncommittal. They said tapering is coming, but they didn’t say it’s coming soon. There’s no expectation of a rate hike hike soon. So it’s really the current status quo, whatever that is. But it’s kind of more of the same for more time.
We don’t really expect much to change in the Fed through 2022. Markets have sufficient headwinds as it is as the world re-normalizes. We don’t expect much exciting happening. We didn’t expect that this month. We don’t expect it for some time.
WSN: Is that why the 10-year bond yields in the U.S. dropped from a four-month low, 1.3163? I look at the bloom at the moment. DO you think…
TN: This could be. But it’s also, you know, the current Fed chair may not be renominated by Biden. And if Jerome Powell is out, we’re likely to see Lael Brainard come in, who is very much a monetary policy activist. So we could see a really active Fed, not a conservative and extremely dovish Fed if Lael Brainard comes in. So I think that could be part of the reason we’re seeing expectations change in some of the bond markets.
PS: Can we shift your attention over to oil? Because as you know, the lack of consensus in OPEC+ and with the failure to negotiate production quotas has really put pressure on oil prices again. Is this conflict going to introduce more short term volatility in oil markets?
TN: Sure, yeah. Until there’s agreement between the U.S. and Saudi Arabia, I think we are going to see volatility because as the UAE creates a gap in expectations, other players like Russia and other folks can potentially violate the OPEC+ agreement. OPEC doesn’t necessarily have a history of agreeing uniformly very often. OPEC+ agreement has been one where they’ve really abided by it pretty well. And so OPEC is more fractious than it is kind of universal. I think we’re going to see volatility for at least a short time. But I do think there is underlying strength in oil prices. We don’t expect the $100 oil any time this year. Some people are calling for that. But we do see continued build in the strength of oil prices through the end of the year marginal bill.
SM: All right. And looking at other indicators, I mean, the US economy is booming, but the US ISM non-manufacturing figure for June came in below market expectations. Could you give us some explanation on what were the reasons for that drop?
TN: You know, the main reason really is unemployment or employment. Companies have had to cope with fewer workers as these federal government subsidies have kept workers on the sidelines. Effectively, they’ve paid workers to sit at home more than they’d make in hourly jobs. And so small companies particularly have had to figure out a way to work without additional workers. So now a lot of those workers are coming off of the federal stimulus packages. But a lot of these small and mid-sized sized companies have kind of learned how to cope without as many workers.
So they’re not trusting new workers until wages really come down. So it’s really kind of putting an impediment in the path for especially small and mid-sized companies. And that’s where there’s a little bit of doubt in the ISM.
WSN: So are we seeing a new economic model then, Tony, where there’s a lot of what we expect in terms of the full and employment numbers will change?
TN: It’s a great question, I certainly hope not. Over the last year and a half, we’ve seen immense government intervention in markets globally. Was the stimulus too much? Was it misallocated? We can argue that all day long. But the fact is, we’ve seen immense government stimulus and it takes a long time for stimulus that large to wash through the system.
We’re seeing the back side and the down side of stimulus. You know, we’ve seen things like inflation rates rise, you know, all this stuff over second quarter, but that’s really just a year on year number. We’re seeing what’s called base effects there. We’re seeing the same in things like wages and impacts on markets from government activity. So Q2 was a huge anomaly for markets and for government because of what’s happening globally with Covid in Q2 of 2020. As we kind of come back to a relatively normal-ish market, maybe by Q4, you know, we’ll start to see more normal readings across wages across, profits and other things.
So there really is a slow build. And as more of that government stimulus gets pulled out of the market or at least slows down, we’ll start to see things normalize. I don’t necessarily think it’s a new model unless the government insists on continuing to intervene and subsidize markets.
WSN: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on the equity markets and even the fixed income market. But what was really surprising is that he thinks Jerome Powell will be replaced as the Fed chair. I was like, “this is news to me. I thought he was doing an OK job.” And usually I would imagine Joe Biden leading them to do their thing.
PS: That’s right. I wouldn’t expect Joe Biden to have places, political perspectives in the appointment of the Fed chair. But I think there are a lot of key decisions that has to be made. And that whole link between the tapering of his asset purchases and adjustment of interest rates, how do you have that delicate balancing act will be very critical.
WSN: Janet Yellen and Jerome Powell worked well together and Janet Yellen is his appointment. So I’m a little bit surprised by this news. But other news that I was like kind of focused on was also the fact that he thinks at the energy market upside is limited. So I think all of us as investors have to adjust our expectations in terms of the returns, because if you talk about the rally from March 2020 lows to now, it’s about 90%. And that’s staggering.
PS: And Tony is alluding to the fact that the stimulus was too broad, not targeted enough, I think, which basically resulted in a wash of cash, I think, creating a lot of frothy markets. And this is the challenge now.
WSN: So how does the bubble kind of burst, right, without creating chaos? Absolutely. You kind of want to deflate it, but not so much.
SM: And can I also draw your attention to something else that Tony said that caught my eye, the fact that he thinks oil isn’t going to hit $100 per barrel. We’re actually going to be discussing more on oil later at seven thirty after the bulletin with Sally Yilmaz of Bloomberg Intelligence. So stay tuned for that conversation on what the oil market’s going to look like.
